Benefits July 15, 2014

Millennials Need to Put Retirement Strategies in Writing

July 15, 2014 (PLANSPONSOR.com) – While Millennials are very focused on retirement-related issues, these employees still need to create a strategy for long-term retirement success, according to a survey from the Transamerica Center for Retirement Studies.
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Millennial employees (those born between 1979 and 1996) are focused on retirement in a big way, says Catherine Collinson, president of the center. “The 15th Annual Transamerica Retirement Survey finds that three out of four are already discussing saving, investing and planning for retirement with family and friends. Millennials are twice as likely to frequently discuss retirement compared to their parents’ generation,” she says. “We also find that 18% of Millennials frequently discuss the topic, compared with just 9% of their Baby Boomer counterparts.”

However, even with this awareness of retirement-related issues, Millennials are still hesitant to put their plans for retirement into writing. While 59% of Millennial employees say they have a retirement strategy, only 13% have a written plan and the other 46% have a plan but have not written it down, according to the results of the survey. Among those who have estimated their retirement savings needs, 52% say they guessed and only 10% have used a retirement calculator or worksheet.

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“One of the most important secrets to attaining retirement readiness is having a well-defined written strategy about retirement income needs, costs, expenses and risk factors,” says Collinson, who is based in Los Angeles. “Over the course of Millennials’ working lives, the retirement landscape will inevitably change. It’s important to begin planning for retirement now and periodically update those plans over the coming decades.”

The results of the survey recommend several strategies Millennial employees can use to create a retirement strategy for the long term, including:

  • Save for retirement. Start saving early and save as much as possible, and save consistently over time. Avoid taking loans and early withdrawals from retirement accounts as they can inhibit the growth of long-term retirement savings.
  • Consider retirement benefits as part of total compensation. Retirement plans, like other employer-provided benefits, are an important part of one’s overall compensation. When comparing job offers, Millennials should make sure they know about all benefits offered by a prospective employer. If working for an employer that does not offer a retirement plan, Millennials should not be afraid to ask about establishing one.
  • Participate in employer-sponsored retirement plans, if available. Many employers also contribute to the company-sponsored retirement plan by matching employees’ contributions. Millennials should take full advantage of matching employer contributions, and defer as much as possible.
  • Calculate retirement savings needs, develop a retirement strategy, and write it down. One of the most important secrets to attaining retirement readiness is having a well-defined written strategy about retirement income needs, costs, expenses and risk factors, according to Transamerica. In creating a plan, factor in living expenses, health care needs, government benefits and long-term care. Envision future retirement and have a backup plan in case retirement comes early due to an unforeseen circumstance. Employees should periodically update their strategy as circumstances and goals change over time.
  • Get educated about retirement investing. Whether relying on the expertise of professional advisers or taking a more do-it-yourself approach, gain the knowledge to ask questions and make informed decisions. Learn about Social Security and government benefits, keeping in mind that benefits may change over time.
  • Seek assistance from a professional financial adviser, if needed. Millennials should ask their employer whether professional adviser services are available through its company-sponsored retirement benefits. If not, check with family and friends for referrals.

Collinson adds that a good job is also a strategically important ingredient for personal retirement security. “It’s virtually impossible to save consistently over time without a steady income. Stay competitive in today’s job market by excelling at your current job, keeping your skills up to date, and staying current with employers’ needs,” she says.

The survey was conducted online within the United States by Harris Poll, on behalf of Transamerica Center for Retirement Studies, between February 21 and March 17, among a sample of 4,143 full-time and part-time workers, including 1,021 Millennials, 1,120 Generation Xers, 1,805 Baby Boomers, and 197 employees who were born prior to 1946.

More information about the survey, specifically about Millennials, can be found here.

Ask the Experts July 15, 2014

(b)lines Ask the Experts – Retirement Plan Contributions from Disability Plan

July 15, 2014 (PLANSPONSOR (b)lines) – “I recently started working at a University and noticed that our disability carrier has been making contributions to our retirement plan on behalf of employees who are currently unable to work due to disability.
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“Apparently we have a rider in our group long-term disability (LTD) plan that provides for such a benefit, so that such employees do not miss out on their retirement plan contributions due to disability. I have never seen these contributions before; does the Internal Revenue Service (IRS) permit such a benefit? And how are such contributions treated for tax purposes?”  

Michael A. Webb, vice president, Cammack Retirement Group, answers:

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Your question is quite timely since the IRS recently released final regulations in this regard (see summary here). Such insurance payments for disabled employees are indeed permissible, and are not taxable to participants at the time the amounts are remitted to the retirement plan, provided that the following conditions are met:

  • Premiums for the disability insurance contract are paid directly from the plan;
  • The plan receives the benefit payments as required by the disability insurance contract;
  • Benefit payments under the contract are paid because of an employee’s inability to continue employment with the employer because of disability; and
  • The benefit payments to a participant’s account aren’t more than a reasonable expectation of what the participant would’ve received as an annual contribution during the disability period, reduced by any other contributions.

 

In the Experts experience, however, the premiums for such insurance are often not paid directly by the plan, but by the employee, the employer or a combination of both. If the disability insurance premiums aren’t paid by the plan, the insurance benefits paid to the plan aren’t a return on a plan investment. Instead, if contributed to the plan, these payments are contributions to the plan governed by qualified plan contribution rules (generally, IRC Section 415(c), which limits contributions to a defined contribution plan, particularly 415(c)(3)(C) which applies to contributions while permanently and totally disabled).

Furthermore, even if not taxable upon contribution to the plan, this does NOT mean that the benefit is completely tax-free. Upon distribution of the participant’s account balance, these contributions would be taxable to the participant is a manner similar to any other plan benefit (with a waiver of the 10% premature distribution penalty in the event of total disability).

Though such contributions are permissible, in actual plan operation, they are often problematic from a compliance perspective. Such contributions are often misclassified in the retirement plan, or not remitted properly, due to the fact that the source of the contributions, the plan’s long-term disability carrier, is unfamiliar with retirement plans. Administration is often a manual process, which can also lead to errors. It is for this reason that some disability carriers provide such a benefit outside of the retirement plan, in a separate trust administered by the insurer. If a plan sponsor chooses to provide such a benefit within the retirement plan, it should work with benefits counsel well-versed in such matters to ensure that no operational failures occur.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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